10 CHAPTER

Electronic Supplement to Chapter 10

C hapters 1 through 11 of this book discuss accounting and reporting procedures for
consolidating the separate operations of parent companies and their subsidiaries. The objec-
tive of consolidation is to report the financial position and results of operations of separate legal
entities as if there were only one economic entity. By contrast, branches are identifiable locations
within a business entity that maintain separate accounting records. Branches are separate accounting
entities, but they are not separate legal entities, and their financial statements are used only for inter-
nal reporting purposes. Financial statements for the business entity are prepared by combining the
financial statements of the branches with those of the central reporting unit of the business.
This supplement distinguishes between sales agency and branch operations, describes accounting
procedures for branch operations, and illustrates procedures for combining home office and branch
financial statements in the preparation of financial statements for the business entity as a whole.
This supplement covers branch accounting in a decentralized accounting system. Modern
computer systems may make this form of branch accounting obsolete, replacing it with a more
cost-efficient, centralized accounting system. When a centralized system is used, the home office
maintains all accounting records and simply uses subsidiary ledger accounts to keep track of
separate branch activities. Branch management may make entries to record transactions directly
into the centralized system.

SA L E S AG ENCIE S AN D B RAN CH E S LEARNING

Technically, there is a distinction between sales agencies and branches. Sales agencies display OBJECTIVE 4
merchandise and take customers orders, but they do not stock merchandise to fill customers
orders or pass on customer credit. The sales agency is not a separate accounting or business entity.
Ordinarily, the only accounting records required for sales agencies are for cash receipts and
disbursements, which are handled in essentially the same manner as petty cash systems. The
central accounting system of the business maintains records of sales made through agency opera-
tions and related cost of sales and other expenses.
By contrast, a branch operation stocks merchandise, makes sales to customers, passes on
customer credit, collects receivables, incurs expenses, and performs other functions normally asso-
ciated with the operations of a separate business enterprise. Such activities are accounted for
through separate branch accounting systems that parallel the systems of independent businesses
except in the manner of accounting for ownership equities and in recording transactions between
branches and the main office of the enterprise.

ES111
ES112 CHAPTER 10

Many of the larger branch operations are the result of business combinations in which the
surviving corporations establish branch entities to account for the operations of the dissolved
combining corporations. In such cases, we can convert the existing information systems of the
combining companies into home office and branch accounting systems with only major adjust-
ments. This method of combining accounting systems is often economical in that it avoids major
changes in existing information systems and minimizes disruptions in normal business operations.
This method also makes it easy to dispose of the new branch if operations prove unprofitable.
Although the technical distinctions for classifying sales agencies and branches may be impor-
tant for marketing, advertising, and other business purposes, they are not particularly helpful for
accounting purposes. Some sales agencies do carry stock in trade, and some branch operations
have limited responsibility for maintaining customer records and approving credit. Many firms
with branch operations have centralized customer credit and billing services on a regional or even
a companywide basis. The accounting system for a remote business location, whether a branch or
an agency, should be designed to accumulate information needed as economically as possible.

SA L ES AG ENC Y ACCO UNT S

Sales agencies do not require complete accounting systems to account for their limited activities.
Ordinarily, cash receipts and disbursement records are sufficient for accounting at agency loca-
tions. Records for sales agency operations must be maintained in the central accounting system of
the controlling enterprise. The amount of data accumulated by the enterprise for agency operations
may be limited to records of cash and display merchandise at agency offices, on the one hand, or
may comprise relatively complete asset and income data, on the other.
If detailed information for a sales agency is not deemed necessary, the following entries may
suffice in account for agency operations:

1. Creation of an agency working capital fund:

Agency working capital (+A) 5,000
Cash (A) 5,000
To record transfer of cash to sales agency.
2. Transfer of sample inventory to sales agency:
Sample inventoryagency (+A) 9,000
Merchandise inventory (or purchases) (A) 9,000
To transfer display merchandise to sales agency.
3. Replenishment of agency working capital at months or years end:
Salaries expenses (E, SE) 2,200
Utilities expenses (E, SE) 700
Advertising expenses (E, SE) 1,200
Miscellaneous expenses (E, SE) 300
Cash (A) 4,400
To record expenses incurred by sales agency and
replenishment of agency working capital.
4. Adjustment of agency sample inventory at months or years end:
Advertising expenses (E, SE) 3,000
Sample inventoryagency (+A) 3,000
To adjust agency sample inventory to net realizable value
and to charge the write-down to advertising expenses.

These entries serve to account for agency expense transactions and cash and merchandise in
possession of agency personnel. However, the system illustrated is not adequate for effective
control over agency expenses or for measuring the contribution of agency operations to enterprise
income, nor does it provide a basis for determining the efficiency of agency operations.
 Electronic Supplement to Chapter 10 ES113

An expansion of the system to accumulate agency sales and expense information provides a
basis for comparing agency expenses over time and with expenses of similar sales agencles, and it
enables profit evaluation of agency operations. The extent of detail accumulated for each sales
agency depends upon the information needs of management.
Journal entries for an expanded agency recordkeeping system follow. The entries identify plant
assets of the Newport sales agency separately. They also show sales, cost of sales, and expense
information on an agency basis:
1. Purchase of Newport sales agency land and buildings:
LandNewport sales agency (+A) 2,000
BuildingsNewport sales agency (+A) 18,000
Cash (A) 20,000
Purchase of facilities for sales agency.
2. Creation of a sales agency working capital fund:
Newport sales agency working capital (+A) 4,000
Cash (A) 4,000
To record transfer of cash to Newport sales agency.
3. Transfer of display merchandise to sales agency:
Newport sales sample inventory (+A) 8,000
Merchandise inventory (A) 8,000
To record transfer of sample merchandise to sales agency.
4. Payment of salaries to employees of sales agency:
Salaries expenseNewport sales agency (E, SE) 3,000
Cash (A) 3,000
To record payment of salaries to sales agency employees.
5. Sales orders from sales agency are filled and
customers are billed:
Accounts receivable (+A) 12,000
SaleNewport sale agency (R, +SE) 12,000
To record credit sales made through Newport sales agency.
Cost of salesNewport sales agency (E, SE) 6,000
Merchandise inventory (A) 6,000
Cost of merchandise delivered to customers of sales agency.
6. Replenishment of agencys working capital fund at year-end:
Advertising expenseNewport sales agency (E, SE) 1,800
Utilities expenseNewport sales agency (E, SE) 400
Other expenseNewport sales agency (E, SE) 300
Cash (A) 2,500
To record replenishment of sales agency working capital.
7. Depreciation recorded on sales agency buildings:
Depreciation expenseNewport sales agency (E, SE) 900
Accumulated depreciationNewport sales agency (A) 900
To record depreciation on sales agency buildings.
8. Sample merchandise at sales agency adjusted to
reflect shopwear:
Advertising expenseNewport sales agency (E, SE) 1,000
Newport sales agency sample inventory (A) 1,000
To record adjustment of sample inventory to realizable value.
ES114 CHAPTER 10

The entries illustrated are examples of how an accounting system can provide separate informa-
tion for agency operations. Accumulation of such information is both practical and inexpensive
even when an enterprise has a large number of sales agency operations.

BRA NC H AC CO UN TI N G S YS T E M S
Branch accounting involves segmenting the accounting system of an enterprise into separate
accounting systems for home office and branch operations. The home office records constitute the
central accounting unit for the enterprise, and branch records constitute adjunct accounting systems
for each branch operation. Firms use separate home office and branch systems for accounting and
internal reporting purposes, but the separate financial statements of the home office and branches
combine into a single set of financial statements for the enterprise to meet external reporting
requirements.
The process of combining home office and branch financial statements is similar to the process
of consolidating parent and subsidiary statements. Reciprocity is established between home office
and branch records by eliminating reciprocal accounts and combining nonreciprocal accounts. We
eliminate unrealized profits from internal transfers between the home office and the branches in
preparing combined financial statements for the enterprise.

Transactions Between the Home Office and the Branch

The home office records transactions of the home office with external entities in its accounting
records in the usual fashion. Similarly, the branch records transactions with unrelated entities on
the branch books in accordance with established accounting procedures. Thus, the unique feature
of home office and branch accounting lies in the manner of recording transactions between the
home office and its branches.
The creation of a new branch requires entries on the books of both the home office and the
branch. Assume that Expando Corporation creates a branch in Splinter, Montana, by transferring
cash of $5,000 and equipment with a cost of $10,000 to the branch manager. Entries on the books
of the home office and the branch are as follows:

Home Office Books

Splinter branch (+A) 15,000
Cash (-A) 5,000
Equipment (-A) 10,000
To record transfer of cash and equipment to Splinter branch.
Branch Books
Cash (+A) 5,000
Equipment (+A) 10,000
Home office (+SE) 15,000
To record receipt of cash and equipment from home office.

The branch account on the home office books is an asset account representing the investment of
the home office in branch net assets. The home office account on the branch books is an equity
account that represents the equity of the home office in branch net assets. Thus, the branch and
home office accounts are reciprocal, each representing the net assets of the branch. This reciprocal
relationship between home office and branch accounts is a continuous relationship. Whenever the
home office increases (debits) its branch account, the branch should increase (credit) its home
office account. Similarly, any decrease (debit) in the home office account on the branch books
should be accompanied by a decrease (credit) in the branch account on the home office books. The
only reasons that differences between home office and branch accounts occur are time lags in
recording information on the two sets of books and errors.
A second type of transaction between home office and branches is for merchandise transfers.
Typically, branches sell merchandise that is manufactured or purchased through home office
operations. A branch manager may or may not have authority to purchase from outside suppliers.
 Electronic Supplement to Chapter 10 ES115

If Expando Corporation ships merchandise to the Splinter branch at its $8,000 home office cost, the
two entities make the following journal entries:

Home Office Books

Splinter branch (+A) 8,000
Shipments to Splinter branch (-E, +SE) 8,000
To record shipments at cost to Splinter branch.
Branch Books
Shipments from home office (E, -SE) 8,000
Home office (+SE) 8,000
To record shipments received from home office.

Two additional reciprocal accounts result from recording the merchandise transfer from home
office to branch. The home offices Shipments to branch account is a contra purchases account
on the home office books, and the Shipments from home office account on the branch books is
essentially a branch purchases or an inventory account. These accounts determine the separate
cost of sales for home office and branch operations, but, because they are reciprocal, we eliminate
them in preparing combined financial statements for the enterprise.

Illustration of Home Office and Branch Accounting

Assume that Jiffy-Stop Corporation created a new branch outlet in Bee. Nebraska, at the beginning
of 2011 and that the transactions of the Bee branch during 2011 are as follows:
1. Received cash of $20,000 from the home office.
2. Purchased equipment with a five-year life for $10,000 cash.
3. Received merchandise shipments from home office at the $16,000 home office cost.
4. Purchased merchandise from outside suppliers for $4,000 cash.
5. Sold merchandise for $30,000 cash.
6. Returned $1,000 of the merchandise acquired from the home office.
7. Paid expenses as follows:

Salaries $6,000
Utilities 1,000
Rent expense 3,000
Other expenses 2,000

8. Remitted $15,000 to the home office.

9. Salaries payable at year-end were $1,000, and depreciation for the year was $2,000.
10. Branch inventory at year-end consisted of $1,000 merchandise acquired from out-
side suppliers and $5,000 acquired from home office.
JOURNAL ENTRIES Exhibit 10-1 illustrates journal entries to record these transactions and related year-
end events on the books of Bee branch. The exhibit also shows journal entries on the home office
books to reflect reciprocal home office items.
The closing entry of Bee branch contains a $2,000 credit to the home office account. This
$2,000 is equal to branch income for the period and reflects the net asset increase from branch
operations. A related adjusting entry on the home office books debits the Bee branch account for
$2,000 and credits Bee branch profit for the period. This home office adjusting entry is roughly
equivalent to a parent-company entry to record its share of subsidiary income for a period under the
equity method of accounting.

COST- OF-SALES COMPUTATIONS The journal entries illustrated in Exhibit 10-1 are based on periodic
inventory procedures that provide detailed information about merchandise transfers between home
office and branch locations. Although this detailed information can be used in the working papers
ES116 CHAPTER 10

EXHIBIT 10-1
J i f f y-S to p C o rp o ra t i o n : Hom e O f fi c e a nd B ra n c h J o u r n a l Ent ri e s

Transaction Home Office Books Bee Branch Books

1 Bee branch (+A) 20,000 Cash (+A) 20,000
Cash (-A) 20,000 Home office (+SE) 20,000
To transfer cash to Bee branch. Receipt of cash from home office.
2 Equipment (+A) 10,000
Cash (-A) 10,000
To record purchase of equipment.
3 Bee branch (+A) 16,000 Shipments from home office (E, -SE) 16,000
Shipments to Bee branch (-E, +SE) 16,000 Home office (+SE) 16,000
To transfer merchandise to Bee Receipt of merchandise
branch at cost. from home office.
4 Purchases (E, -SE) 4,000
Cash (-A) 4,000
To record cash purchases.
5 Cash (+A) 30,000
Sales (R, +SE) 30,000
To record cash sales.
6 Shipments to Bee branch (E, -SE) 1,000 Home office (-SE) 1,000
Bee branch (-A) 1,000 Shipments from home office (-E, +SE) 1,000
Merchandise returned from Bee Merchandise returned to home
branch. office.
7 Salaries expense (E, -SE) 6,000
Utilities expense (E, -SE) 1,000
Rent expense (E, -SE) 3,000
Other expense (E, -SE) 2,000
Cash (-A) 12,000
To record payment of expenses.
8 Cash (+A) 15,000 Home office (-SE) 15,000
Bee branch (-A) 15,000 Cash (-A) 15,000
Cash received from Bee branch. To record cash remittance to home office.
9 Adjusting Entries
Salaries expense (E, -SE) 1,000
Salaries payable (+L) 1,000
Accrued salaries.
Depreciation expense 2,000
equipment (E, -SE)
Accumulated depreciation 2,000
equipment (-A)
Depreciation expense $10,000 5 years
10 Adjusting Entry Closing Entry
Bee branch (+A) 2,000 Sales (-R, -SE) 30,000
Bee branch profit (R, +SE) 2,000 Inventory (+A) 6,000
To record Bee branch profit Shipments from home
for the period. office (-E, +SE) 15,000
Purchases (-E, +SE) 4,000
Salaries expense (-E, +SE) 7,000
Depreciation expense (-E, +SE) 2,000
Utilities expense (-E, + SE) 1,000
Rent expense (-E, +SE) 3,000
Other expenses (-E, +SE) 2,000
Home office (+SE) 2,000
To close income accounts to home office.
 Electronic Supplement to Chapter 10 ES117

to combine the home office and branch accounts for external reporting, it is convenient to group the
separate inventory, purchases, and shipment data into individual cost-of-sales categories for effi-
cient preparation of working papers. Separate cost-of-sales computations for the home office and
branch of Jiffy-Stop follow:
Home Office Bee Branch

Inventory January 1 $ 85,000 $

Purchases 150,000 4,000
Shipments to branch (15,000)
Shipments from home office 15,000
Goods available for sale 220,000 19,000
Inventory December 31 (80,000) (6,000)
Cost of sales $140,000 $13,000

We include data for home office purchases and inventories in the cost-of-sales computations
without prior explanation.

WORKING PAPERS Home office and branch accounting records may be combined using either the trial
balance or the financial statement working paper format. Exhibits 10-2 and 10-3 illustrate these
approaches for the Jiffy-Stop Corporation. We include data for the home office in the working
papers to complete the illustrations.
Adjusted trial balances for Jiffy-Stops home office and its Bee branch are shown in the first two
columns of the trial balance working papers in Exhibit 10-2. The working paper procedures are
comparable to those for the trial balance working papers used in preparing consolidated financial
statements. Only two working paper entries are needed: one entry to establish reciprocity between
the branch and home office accounts by eliminating the Bee branch profit and reducing the branch
account to its preadjusted balance, and a second entry to eliminate reciprocal home office and
branch account balances. These entries are similar to consolidation working paper entries to elimi-
nate income from subsidiaries against the parent companys investment in subsidiary account and,
subsequently, to eliminate reciprocal investment and equity balances.
The same working paper entries are used in combining the home office and branch accounts in
Exhibit 10-3. when the financial statement format is used. Under the financial statement format,
however, the absence of a retained earnings account in the ledger of the branch necessitates a
change in the retained earnings section of the working papers. The equity account of a branch is its
home office account, so the branch column of the working papers shows changes in the home office
account from current operations. Observe that working paper entry a of Exhibit 10-3 returns the
Bee branch account on the home office books to its $20,000 preadjusted balance to establish reci-
procity with the $20,000 preclosing balance of the home office account. Subsequently, entry b
eliminates these reciprocal balances. Other aspects of the home office and branch working papers
are the same as those for working papers of parent and subsidiary operations. Normally, only the
combined financial statements that reflect the financial position and results of operations for the
entity as a whole are used for external reporting purposes.

M ER C H AN DI S E S H I P M E N T S IN EXCES S OF CO ST
The procedures illustrated for Jiffy-Stop base merchandise shipments between the home office
and Bee branch at home office cost. Many corporations, however, use transfer prices in excess of
cost for internal shipments to their branches. Some corporations set transfer prices at normal
sales prices, whereas others use standard markups. Still other corporations develop complex for-
mulas for determining transfer prices. Reasons commonly cited for internal transfers of mer-
chandise above cost include equitable allocation of income between the various units of the
enterprise, efficiency in pricing inventories, and concealment of the true profit margins from
branch personnel.

Shipments to Branch Recorded at Cost

When a home office ships merchandise to its branches at transfer prices in excess of cost,
the accounting records of the home office reflect measurement of actual cost of merchandise
transferred. This is usually done through an inventory loading or unrealized profit account.
ES118 CHAPTER 10

EXHIBIT 10-2
C o m b i n i n g Wo rk i n g P ap e rs Tri a l Ba la n c e A pp r oac h

JIFFY-STOP CORPORATION HOME OFFICE AND BRANCH WORKING PAPERS FOR THE YEAR ENDED
DECEMBER 31, 2011 (IN THOUSANDS)
Home Bee Adjustments and Income Retained Balance
Office Branch Eliminations Statement Earnings Sheet

Debits
Cash $ 41 $ 9 $ 50

Accounts receivable 60 60

Inventoriesending 80 6 86

Land 20 20

Buildingsnet 100 100

Equipment net 52 8 60

Bee branch 22 a 2
b 20

Cost of sales 140 13 $(153)

Salaries expense 43 7 (50)

Depreciation expensebuildings 5 (5)

Depreciation expenseequipment 8 2 (10)

Utilities expense 6 1 (7)

Rent expense 3 (3)

Other expenses 8 2 (10)

Dividends 10 $ (10)

$595 $51 $376

Credits
Account payable $ 50 $ 50

Salaries payable 4 $ 1 5

Capital stock 200 200

Retained earnings 110 110

Home office 20 b 20

Sales 229 30 259

Bee branch profit 2 a 2

$595 $51

Net income $ 21 21

Retained earnings December 31 $121 121

$376
 Electronic Supplement to Chapter 10 ES119

JIFFY-STOP CORPORATION HOME OFFICE AND BRANCH WORKING PAPERS EXHIBIT 10-3
FOR THE YEAR ENDED DECEMBER 31, 2011 (IN THOUSANDS) C o m b i n i n g Wo rk i n g
Pa p e rs F i n a n c i a l
Home Bee Adjustments and Combined S tatem en t A pp ro ac h
Office Branch Eliminations Statement

Income Statement
Sales $229 $30 $259

Bee branch profit 2 a 2

Cost of sales (140) (13) (153)

Salaries expense (43) (7) (50)

Depreciation expensebuildings (5) (5)

Depreciation expenseequipment (8) (2) (10)

Utilities expense (6) (1) (7)

Rent expense (3) (3)

Other expenses (8) (2) (10)

Net income $ 21 $ 2 $ 21

Retained Earnings/Home Office

Retained earnings January 1 $110 $110

Home office (preclosing) $20 b 20

Net income 21 2 21

Dividends (10) (10)

Retained earnings/home office $121 $22 $121

Balance Sheet
Cash $ 41 $ 9 $ 50

Accounts receivablenet 60 60

Inventory 80 6 86

Land 20 20

Buildingsnet 100 100

Equipmentnet 52 8 60

Bee Branch 22 a 2
b 20

$375 $23 $376

Accounts payable $ 50 $ 50

Salaries payable 4 $ 1 5

Capital stock 200 200

Retained earnings 121 121

Home office 22

$375 $23 $376

ES120 CHAPTER 10

For example, if Southern Fashion Marts home office ships merchandise that costs $100,000 to its
Tampa branch at a 20% markup based on cost, the home office and branch entries are as follows:
Home Office Books
Tampa branch (+A) 120,000
Shipments to Tampa branch (-A) 100,000
Loading Tampa branch inventory (-A) 20,000
To record shipments to Tampa branch at 120% of cost.
Tampa Branch Books
Shipments from home office (E, -SE) 120,000
Home office (+SE) 120,000
To record receipt of merchandise from home office.

Entries to record transfers of merchandise at prices in excess of cost do not change the recipro-
cal relationship between the home office and branch accounts, but they do affect the relationship
between home office and branch shipment accounts, because the Shipments to branch account is
credited at cost and the Shipments from home office account is debited at the transfer price. The
difference between the shipment accounts lies in the markup reflected in the Loading in branch
inventories account, which is frequently designated as unrealized profit in branch inventories.
When a branch receives merchandise at transfer prices that include a loading factor and it sells
that merchandise, it overstates its cost of goods sold and understates its income. The home office
increases its branch account and records branch profit or loss on the basis of income reported by the
branch, so any branch profit recorded by the home office is similarly understated. This understate-
ment of branch profit on home office books is corrected by a year-end adjusting entry that reduces
the loading account to reflect amounts realized during the period through branch sales to outside
entities.
Assume that the following account balances appear on the books of Southern Fashion Marts
home office and branch at December 31, 2011, before adjusting entries:
Home Office Books
Tampa branch $200,000 debit
Shipments to Tampa branch 100,000 credit
Loading in Tampa branch inventory 20,000 credit
Tampa Branch Books
Sales $160,000 credit
Shipments from home office 120,000 debit
Expenses 30,000 debit
Home office 200,000 credit

If the Tampa branch has $12,000 inventory at transfer prices on December 31, 2011, it reports
income for the period of $22,000 (sales of $160,000, less cost of sales of $108,000 and other
expenses of $30,000). The branch closing entry for the period is:
Sales (-R, -SE) 160,000
Inventory December 31, 2011 12,000
Shipments from home office (-E, +SE) 120,000
Expenses (-E, +SE) 30,000
Home office (+SE) 22,000
To close nominal accounts and transfer the balance
to the home office account.

The home office uses this information to record branch profit for the period:
Tampa branch (+A) 22,000
Tampa branch profit (R, +SE) 22,000
To take up branch profit and to update the branch
account.
 Electronic Supplement to Chapter 10 ES121

The home office also adjusts its loading account to reflect the $2,000 unrealized profit in branch
ending inventory [$12,000 - ($12,000 120%)]:

Loading in Tampa branch inventory (+A) 18,000

Tampa branch profit (R, +SE) 18,000
To adjust branch loading account ($20,000 - $2,000)
and branch profit for the period.

After posting this entry, the loading account will have a $2,000 balance equal to the $2,000
unrealized profit in the Tampa branch ending inventory, and the Tampa branch profit account will
show a balance of $40,000. This $40,000 is the income of the branch on a cost basis, an amount
subject to independent confirmation as follows:

Sales $160,000
Shipments to branch (at cost) $100,000
Less: Inventory (at cost) 10,000 90,000
Gross profit 70,000
Other expenses (30,000)
Branch income $ 40,000

When we add the $40,000 branch profit to separate home office income for the period, the total
equals combined net income for the enterprise. Although year-end entries for subsequent years are
substantially the same as those illustrated, there will be a difference because the branch will have a
beginning inventory stated at transfer prices, and the home office will have a beginning balance in
its loading account equal to the unrealized profit in the branch beginning inventory. An example of
branch accounting for Dasher Corporation at the end of this supplement illustrates accounting pro-
cedures for unrealized profits in both beginning and ending branch inventories.

Shipments to Branch Recorded at Billing Prices

Some firms enter merchandise shipments to their branches at billing prices and adjust the loading
account at the end of the accounting period. When using this approach, the balance of the loading
account during an accounting period will reflect unrealized profit in branch beginning inventories,
and the Shipments to branch account will include the loading factor on shipments for the current
period. The Shipments to branch account (home office books) and the Shipments from home office
account (branch books) are reciprocals under this method.
To illustrate, Southern Fashion Marts shipments to the Tampa branch could have been recorded
at billing prices as follows:

Home Office Books

Tampa branch (+A) 120,000
Shipments to Tampa branch (-E, +SE) 120,000

With this entry, the home office and branch shipment accounts have equal balances, but two year-
end adjusting entries are needed:

Home Office Books

Shipments to Tampa branch (E, -SE) 20,000
Loading in Tampa branch inventory (-A) 20,000
To adjust shipments to a cost basis.
Loading in Tampa branch inventory (+A) 18,000
Tampa branch profit (R, +SE) 18,000
To adjust branch profit for realization of markup on branch shipments.

The first entry adjusts the Shipments to branch and Loading in branch inventory accounts to
create balances of $100,000 and $20,000 respectively. The second entry to adjust branch
profit for the loading factor is the same as the one shown earlier.
ES122 CHAPTER 10

FR EI G H T CO STS O N S HI P M E N T S
The cost of transporting merchandise to its final sale location can be an important element of the
cost of merchandise inventoried and sold. Accordingly, freight costs on merchandise shipped
between home office and branch locations should be included in branch inventory and cost of
goods sold measurements. Assume that a home office ships merchandise to its branch at 125% of
the $10,000 home office cost and that the home office pays $500 freight costs. The home office and
branch journal entries are as follows:

Home Office Books

Branch (+A) 13,000
Shipments to branch (-E, +SE) 10,000
Loading in branch inventory (-A) 2,500
Cash (-A) 500
To record shipments to branch.

Branch Books
Shipments from home office (E, -SE) 12,500
Freight-in on home office shipments (E, -SE) 500
Home office (+SE) 13,000
To record receipt of merchandise from home office.

If half the merchandise remains unsold at year-end, the branch reports cost of branch sales at
$6,500 and prices the branch inventory at its $6,250 home office cost, plus $250 freight-in. Branch
inventory and cost of goods sold are reported in the same amount if the branch pays the transporta-
tions costs, but the freight transaction is not recorded on the home office books.
Merchandise cost should not include excessive freight charges from the transfer of merchandise
between a home office and its branches or between branch locations. If the branch returns half the
merchandise received from the home office because it is defective or because of a shortage of
inventory at the home office location, the home office cost of the merchandise should not include
the freight charges to or from the branch. Assuming that the branch pays $250 to return half the
merchandise to the home office, the branch and home office entries are as follows:

Branch Books
Home office (-SE) 6,750
Shipments from home office (-E, +SE) 6,250
Freight-in on home office shipments (-E, +SE) 250
Cash (-A) 250
To record return of merchandise to the home office.

Home Office Books

Shipments to branch (E, +SE) 5,000
Loading in branch inventory (+A) 1,250
Loss on excessive freight charges (E, -SE) 500
Branch (-A) 6,750
To record merchandise returned from branch location.

The home office charges total freight charges on the merchandise to its loss on excessive
freight charges account because the freight charges represent management mistakes or inefficien-
cies. Therefore, they are not considered normal operating or freight expenses.
A second example of excessive freight charges involves shipments between branches. Assume
that the home office of Maxwell Industries ships merchandise at its $50,000 cost from Chicago to
its St. Louis branch and pays $2,000 freight charges on the merchandise. A few days later, the
Omaha branch experiences a merchandise shortage from St. Louis to Omaha at a $1,200 cost paid
by the St. Louis branch. The cost of shipping the merchandise from Chicago to Omaha would have
 Electronic Supplement to Chapter 10 ES123

ENTRIES TO RECORD SHIPMENT TO ST. LOUIS BRANCH EXHIBIT 10-4

M axw el l I n d u s t ri e s
Home Office Books
52,000 Ex c e s s i v e F r e i g h t
St. Louis branch (+A)
50,000 Ch arg e s
Shipments to St. Louis branch (-E, +SE)
Cash (-A) 2,000
To record shipment to St. Louis branch.
St. Louis Branch Books
Shipments from home office (E, -SE) 50,000
Freight-in on home office shipments (E, -SE) 2,000
Home office (+SE) 52,000
To record merchandise received from home office.
ENTRIES TO RECORD TRANSFER FROM ST. LOUIS TO OMAHA
Home Office Books
Omaha branch (+A) 51,800
Loss on excessive freight charges (E, -SE) 1,400
Shipments to St. Louis branch (E, -SE) 50,000
St. Louis branch (-A) 53,200
Shipments to Omaha branch (-E, +SE) 50,000
To record transfer of merchandise from St. Louis branch
to Omaha branch.
St. Louis Branch Books
Home Office (-SE) 53,200
Shipments from home office (-E, +SE) 50,000
Freight-in on home office shipments (-E, +SE) 2,000
Cash (-A) 1,200
To record transfer of merchandise to Omaha branch.
Omaha Branch Books
Shipments from home office (E, -SE) 50,000
Freight-in on home office shipments (E, -SE) 1,800
Home office (+SE) 51,800
To record receipt of merchandise from home office via
the St. Louis branch.

been $1,800. Exhibit 10-4 shows the entries to record the initial shipment to the St. Louis branch
and the subsequent transfer to the Omaha branch.
In addition to adjusting shipment accounts and home office and branch accounts, the freight
accounts must be adjusted. Total freight charges incurred were $3,200 ($2,000 + $1,200), but the
cost of shipping merchandise from the home office directly to the Omaha branch would have been
$1,800. Only $1,800 is recorded as an inventoriable cost on the books of the Omaha branch. The
duplicate shipments are assumed to have resulted from home office management errors, so the
$1,400 excessive freight is recorded as a home office loss. This accounting treatment is consistent
with the accounting principle that inventory costs include only those costs necessary to get mer-
chandise ready for final sale to customers.

H O M E O FF IC E A ND BR A NC H EX P EN S E A LL O CATI ON
The allocation of expenses among home office and branch operations is frequently necessary to
provide an accurate measurement of income for the separate units of the enterprise. Advertising
expense, for example, may relate to sales efforts of the home office and one or more branches. If
such advertising is paid by the home office, that part related to branch sales should be allocated
to the branches. Pension costs paid by the home office and home office general and administra-
tive expenses may also be allocated to branch operations in order to provide complete profit
information for each business unit. Another situation that requires expense allocation for com-
plete profit information arises when plant asset records are centralized in the home office
accounting system.
ES124 CHAPTER 10

Some examples of accounting for these expense allocations follow. If a branch pays $5,000 for
advertising that relates equally to branch and home office sales efforts, the $5,000 could be allo-
cated as follows:

Branch Books
Advertising expense (E, -SE) 2,500
Home office (-SE) 2,500
Cash (-A) 5,000
To allocate advertising expense 50% to home office.

Home Office Books

Advertising expense (E, -SE) 2,500
Branch (-A) 2,500
To record advertising expense paid by branch.

Pension and general home office expenses of $50,000 and $120,000, respectively, that are
incurred by the home office and allocated 25% each to the Denver and Cheyenne branches would
be recorded as follows:
Home Office Books
Denver branch (+A) 42,500
Cheyenne branch (+A) 42,500
Pension expense (-E, +SE) 25,000
General expenses (-E, +SE) 60,000
To allocate pension and general expenses
to branch operations.

Denver Branch Books

Pension expense (E, -SE) 12,500
General expenses (E, -SE) 30,000
Home office (+SE) 42,500
To record expense allocations from home office.

Cheyenne Branch Books

Pension expense (E, -SE) 12,500
General expenses (E, -SE) 30,000
Home office (+SE) 42,500
To record expense allocations from home office.

These examples illustrate the basic approach to expense allocations among home office and
branch operations. Other expense items are allocated in similar fashion.

REC O N CI LI ATIO N OF H O M E O FFIC E A ND BR AN C H ACCO UNT S

Reciprocity between home office and branch accounts will not exist at year-end if errors have
been made in recording reciprocal transactions either on the home office or the branch books, or
if transactions have been recorded on one set of books but not on the other. The approach for rec-
onciling home office and branch accounts at year-end is similar to the approach used for bank rec-
onciliations. A home office/branch reconciliation is illustrated in Exhibit 10-5 for Empire
Corporations home office and its Rochester branch at December 2011 according to the following
assumptions:
1. Balances on December 31, 2011: Home office account (branch books), $452,300;
Rochester branch account (home office books), $492,000.
2. The Rochester branch sent a check for $12,000 cash to the home office on
December 31, 2011. The home office did not receive the check until January 4, 2012.
 Electronic Supplement to Chapter 10 ES125

EMPIRE CORPORATION HOME OFFICE AND ROCHESTER BRANCH EXHIBIT 10-5

RECONCILIATION AT DECEMBER 31, 2011 Recon cili ati o n o f
Hom e O f fi c e an d
Home Office Rochester B ra n c h A c c o u n t s
Account Branch Account
(Branch Books) (Home Office Books)

Balance per books, December 31, 2011 $452,300 $492,000

Cash in transitRochester branch to

home office (12,000)

Shipments in transit to Rochester branch 25,000

Error correction: Advertising expenses

of $8,500 were recorded as $5,800 2,700

Adjusted balances, December 31, 2011 $480,000 $480,000

3. The home office shipped merchandise costing $20,000 to its Rochester branch on
December 28, 2011, at a transfer price of $25,000. The merchandise was not
received by the Rochester branch until January 8, 2012.
4. Advertising expenses of $8,500 were allocated by the home office to the Rochester
branch. The expenses were recorded at $5,800 by the branch.
The following entry is made on the home office books to reflect cash in transit at December 31,
2011:

Cash in transit (+A) 12,000

Rochester branch (-A) 12,000
To record cash in transit on December 31, 2011

Although it is convenient to use the title cash in transit to ensure proper recording of the
actual cash receipt, the cash is not in transit from the viewpoint of the combined entity, and
it must be reported as cash and not cash in transit in the combined financial statements of
the enterprise.
Correcting entries on the books of the Rochester branch to reflect the items in the reconciliation
are as follows:

Shipments from home officein transit (E, SE) 25,000

Home office (+SE) 25,000
To record merchandise in transit from the home office.
Advertising expense (E, SE) 2,700
Home office (+SE) 2,700
To correct an error in recording an advertising
expense allocation from home office as $5,800
rather than $8,500.

After updating the accounts to reflect these correcting entries, the home office and branch
accounts have reciprocal balances.

I L L U S T R AT I ON OF H O M E O FFIC E A ND BR AN C H ACCO UN TI N G
Dasher Corporation of Philadelphia has operated a sales branch in Dot, Rhode Island, for a number
of years. All merchandise shipped to the Dot branch is transferred at normal sales prices, which are
125% of home office cost. The Dot branch also purchases merchandise from outside suppliers.
ES126 CHAPTER 10

This merchandise is sold by Dot at a 25% markup based on invoice cost. Balance sheets for Dasher
Corporations home office and its Dot branch at December 31, 2011 are as follows:
DASHER CORPORATION HOME OFFICE AND BRANCH
BALANCE SHEETS AT DECEMBER 31, 2011

Home Office Dot Branch

Assets
Cash $ 25,000 $11,000
Accounts receivablenet 42,000 23,000
Inventory 20,000 16,000
Plant assetsnet 70,000
Dot branch 43,000
Total assets $200,000 $50,000
Liabilities and Equity
Accounts payable $ 14,000 $ 5,000
Other liabilities 10,000 2,000
Loadingbranch inventory 1,600
Home office 43,000
Capital stock 150,000
Retained earnings 24,400
Total liabilities and equity $200,000 $50,000

The home office maintains all plant asset records for Dashers home office and Dot branch on its
books. Half of the $16,000 branch inventory at December 31, 2011, was received from local sup-
pliers, and the remaining $8,000 was received from the home office at established transfer prices.
Exhibit 10-6 presents a summary of the transactions of Dashers home office and Dot branch for
2012 and journal entries to record the transactions.
1. Dashers sales for 2012 were $281,750, of which $200,000 were home office sales
and $81,750 were sales made by the Dot branch. All sales were on account.
2. Home office and branch purchases on account for 2012 were $205,000 and
$20,000, respectively. The home office shipped $40,000 of merchandise to the Dot
branch at a transfer price of $50,000.
3. The home office collected $195,000 on account during 2012, and the Dot branch
collected $79,750.
4. The Dot branch transferred $55,000 cash to the home office during 2012.
5. Payments on account were home office, $210,000: Dot branch, $21,000.
6. During 2012, the home office paid operating expenses of $20,000, and the Dot
branch paid operating expenses of $2,000. Of the operating expenses paid by the
home office, $1,000 was allocated to the Dot branch.
7. Total depreciation for the year was $8,000, of which $1,500 was allocated to branch
operations.
Year-end inventories are $25,000 for the home office and $10,000 for the Dot branch, with half
of the branch inventory consisting of merchandise acquired from the home office. Thus, total
inventories for Dasher Corporation on a cost basis are $34,000, computed as follows:
Home office inventory $25,000
Branch inventory acquired through purchases 5,000
Branch inventory transferred from home office: $5,000 / 1.25 4,000
Total inventories $34,000
Separate cost-of-sales calculations for inclusion in the combined working papers for the home
office and the Dot branch are as follows:
Home Office Dot Branch

Inventory January 1, 2012 $ 20,000 $ 16,000

Purchases 205,000 20,000
Shipments to branch (40,000)
Shipments from home office 50,000
Goods available for sale 185,000 86,000
Inventory December 31, 2012 (25,000) (10,000)
Cost of sales $160,000 $ 76,000
 Electronic Supplement to Chapter 10 ES127

EXHIBIT 10-6
Com pa r a tiv e J o u r n a l Ent rie s fo r Hom e O ffi c e a nd B ra n c h

DASHER CORPORATION HOME OFFICE AND DOT BRANCH JOURNAL ENTRIES FOR THE YEAR 2012
Item
Number Home Office Books Dot Branch Books

1 Accounts receivable (+A) 200,000 Accounts receivable (+A) 81,750

Sales (R, +SE) 200,000 Sales (R, +SE) 81,750
To record sales on account To record payments on account.

2 Purchases (E, -SE) 205,000 Purchases (E, -SE) 20,000

Accounts payable (+L) 205,000 Accounts payable (+L) 20,000
To record parchases on account. To record parchases on account.
Dot branch (+A) 50,000 Shipments from home office (E, -SE) 50,000
Shipments to Dot branch (-E, +SE) 40,000 Home office (+SE) 50,000
Loadingbranch Inventory (-A) 10,000 To record receipt of merchandise
To transter merchandise to Dot from home office.
branch at 125% of cost.

3 Cash (+A) 195,000 Cash (+A) 79,750

Accounts receivable (-A) 195,000 Accounts receivable (+A) 79,750
To record collections on accounts To record collections on
receivable. accounts receivable.

4 Cast (+A) 55,000 Home office (-SE) 55,000

Dot branch (-A) 55,000 Cash (-A) 55,000
To record receipt of cash To record cash remittance
from Dot branch. to home office

5 Accounts payable (-L) 210,000 Accounts payable (-L) 21,000

Cash (-A) 210,000 Cash (-A) 21,000
To record payments on account. To record payments on account.

6 Operating expenses (E,-SE) 20,000 Operating expenses (E,-SE) 2,000

Cash (-A) 20,000 Cash (-A) 2,000
To record payments of expenses. To record payments of expenses.

Dot branch (+A) 1,000 Operating expenses (E,-SE) 1,000

Operating expenses (-E, +SE) 1,000 Home office (+SE) 1,000
To record allocation of expenses To record expenses allocated from
to Dot branch. home office.

7 Dot branch (+A) 1,500 Operating expenses (E,-SE) 1,500

Operating expenses (E,-SE) 6,500 Home office (+SE) 1,500
Accumulated depreclation (-A) 8,000
To record depreciation allocated To record allocation of depreciation
to Dot branch. from home office.

Trial balances prepared at December 31, 2012, after the transactions summarized in Exhibit 10-6
were recorded, and inventory items grouped into cost-of sales categories are shown in the first two
columns of Exhibit 10-7. These trial balances were taken before the home office recorded income
from the Dot branch for the year, so the home office and branch accounts have reciprocal balances.
The working paper entries needed to combine the accounts of the home office and branch in
general journal form follow:

a Loading in branch inventory (+A) 1,600

Cost of sales (-E, +SE) 1,600
To eliminate loading in beginning branch Inventory
now included in cost of sales.
ES128 CHAPTER 10

b Loading in branch inventory (+A) 10,000

Cost of sales (-E, +SE) 10,000
To eliminate loading in current-year shipments to branch.
c Cost of sale (E, -SE) 1,000
Inventories (-A) 1,000
To eliminate loading in ending branch inventory.
d Home office (-SE) 40,500
Dot branch (-A) 40,500
To eliminate reciprocal home office and branch balances.

EXHIBIT 10-7
DASHER CORPORATION HOME OFFICE AND BRANCH WORKING PAPERS
C o m b i n i n g Wo rk i n g FOR THE YEAR ENDED DECEMBER 31, 2012 (IN THOUSANDS)
P ap e r s
Home Dot Adjustments and Income Balance
Office Branch Eliminations Statement Sheet

Debits
Cash $ 45 $ 12.75 $ 57.75

Accounts receivablenet 47 25 72

Inventories 25 10 c 1 34

Plant assetsnet 62 62

Dot branch 40.5 d 40.5

a 1.6
Cost of sales 160 76 c 1 b 10 $(225.4)

Operating expenses 25.5 4.5 (30)

$405 $128.25 $225.75

Credits
Accounts payable $ 9 $ 4 $ 13

Other liabilities 10 2 12

Loading in branch inventory 11.6 a 1.6

b 10

Home office 40.5 d 40.5

Capital stock 150 150

Retained earnings 24.4 24.4

January 1, 2012

Sales 200 81.75 281.75

$405 $128.25

Net income $ 26.35 26.35

$225.75
 Electronic Supplement to Chapter 10 ES129

The home office and branch working papers in Exhibit 10-7 do not contain a retained earnings
column. Dashers net income for the period is the only item affecting the ending retained earnings
balance, so it is convenient to omit the separate retained earnings column and to carry net income
for the period directly to the balance sheet column.
Adjusting and closing entries for the Dot branch and home office are as follows:

Dot Branch Closing Entry

Sales (-R, -SE) 81,750
Inventory December 31, 2012 (+A) 10,000
Inventory January 1, 2012 (-A) 16,000
Purchases (-E, +SE) 20,000
Shipments from home office (-E, +SE) 50,000
Operating expenses (-E, +SE) 4,500
Home office (+SE) 1,250
Home Office Adjusting and Closing Entries
Dot branch (+A) 1,250
Dot branch profit (R, +SE) 1,250
Loading in branch inventory (E, -SE) 10,600
Dot branch profit (R, +SE) 10,600
Unrealized profit per books of $11,600, less $1,000
unrealized profit in branch ending inventory =
$10,600 adjustment.
Sales (-R, -SE) 200,000
Inventory December 31, 2012 (+A) 25,000
Shipments to Dot branch (E, -SE) 40,000
Dot branch profit (-R, -SE) 11,850
Inventory January 1, 2012 (-A) 20,000
Purchases (-E, +SE) 205,000
Operating expenses (-E, +SE) 25,500
Retained earnings (+SE) 26,350

The $1,250 income reported by the branch does not include any margin on goods received
from the home office. This element of branch profit is recorded by the home office when it
adjusts its loading account at year-end. Branch income for the year on a cost basis to the
business entity is $11,850, an amount that appears in the separate home office income statement
for 2012.
Comparative balance sheets and income statements for Dasher Corporations home office, its
Dot branch, and its home office and branch combined appear in Exhibit 10-8, These statements
are presented to highlight differences between separate home office and branch statements and
combined statements for the enterprise. Note that the cost of sales on the home office books is
equal to 80% of home office sales ($160,000 $200,000) and that combined cost of sales is
equal to 80% of combined sales ($225,400 $281,750), reflecting the companywide policy of set-
ting sales prices at 25% above cost. This relationship does not exist between branch cost of sales
and sales because branch shipments from the home office are recorded on the branch books at sell-
ing prices. All the items in the comparative statements have been covered individually, so we do not
provide additional discussion.
ES130 CHAPTER 10

EXHIBIT 10-8
DASHER CORPORATION COMPARATIVE FINANCIAL STATEMENTS AT AND
S e p a r a t e Ho m e FOR THE YEAR ENDED DECEMBER 31, 2012
O f fi c e a n d Br a nc h
a n d Combi ne d Home Office Dot Branch Combined
F i n an c i a l
S ta te m e n t s Balance SheetsDecember 31, 2012
Assets
Cash $ 45,000 $12,750 $ 57,750
Accounts receivablenet 47,000 25,000 72,000
Inventories December 31 25,000 10,000 34,000
Dot branch 41,750
Plant assetsnet 62,000 62,000
Total assets $220,750 $47,750 $225,750
Liabilities and Equity
Accounts payable $ 9,000 $ 4,000 13,000
Other liabilities 10,000 2,000 12,000
Loadingbranch Inventory 1,000
Home office 41,750
Capital stock 150,000 150,000
Retained earnings 50,750 50,750
Total liabilities and equity $220,750 $47,750 $225,750
Income Statements for 2012
Sales $200,000 $81,750 $281,750
Dot branch Income 11,850
211,850 81,750 281,750
Cost of sales (160,000) (76,000) (225,400)
Operating expenses (25,500) (4,500) (30,000)
Net income $ 26,350 $ 1,250 $ 26,350

SUMMAR Y
Enterprises frequently conduct activities at diverse business locations by means of branches and
sales agencies. Separate accounting systems are not required for sales agency operations, but the
accounting system of the business entity may be expanded in order to provide information about
agency operations for purposes of planning, control, and evaluation. By contrast, home office and
branch operations are accounted for through separate home office and branch accounting systems.
The home office accounts for its investment in the net assets of its branches by means of branch
accounts that are reciprocal to home office accounts on the books of the branches. Reciprocal
home office and branch accounts are eliminated when home office and branch financial statements
are combined into financial statements for the enterprise.
Transactions between a home office and its branches require journal entries that are unique to
home office and branch accounting systems. Entries to account for other transactions are recorded
in the usual manner. Merchandise shipments to branches and related transfer pricing strategies
require special attention in order to avoid recognition of unrealized profits. Other areas of concern
in home office and branch accounting include expense allocation, account reconciliation, and year-
end accounting procedures. Separate home office and branch financial statements are used only for
internal purposes. Financial statements for the enterprise as a whole are developed by combining
the separate statements of the home office and its branches.

A S SI G N M E N T M AT E R I A L

W 10-1
How does branch accounting differ from accounting for sales agencies?

W 10-2
Should a company maintain separate accounts for subsidiary records in order to identify the revenues and expenses
associated with operations of each of its sale agencies? Discuss.
 Electronic Supplement to Chapter 10 ES131

W 10-3
When are expenses paid by a sales agency recorded on the books of the central accounting unit of the enterprise?
W 10-4
Alternative account titles for the branch account on the books of the home office include Tampa branch, Investment
in Tampa branch, and Tampa branchcurrent. Describe the nature and function of this account.
W 10-5
Explain the nature of the Shipments to branch account on the home office books and the Shipments from home
office account on the branch books.
W 10-6
The accounts Shipments to branch and Shipments from home office may or may not have reciprocal balances.
When should the account balances be reciprocal and when would they be different?
W 10-7
What advantage can you see for a firm to set transfer prices to its branches at normal billing prices?
W 10-8
Does the allocation of home office expenses to branch operations affect the income at an enterprise? if not, what is the
advantage of such allocation? Discuss.
W 10-9
Home office and branch journal entries
Arnimal Corporation is located in Dallas, Texas, and its branch is located in Fort Worth, Texas. Transactions and events
affecting the Fort Worth branch during 2011 are summarized as follows:
1. Received shipments from the home office, billed at $10,000 home office cost.
2. Purchased merchandise from Alta Wholesalers, $4,000.
3. Sold merchandise to customers on account in the amount of $20,000.
4. Paid operating expenses, $3,000.
5. Returned 20% of the merchandise received in item 1 to the home office.
6. Paid $2,000 for advertising, 50% of which is a home office expense.
7. Received a debit memo from the home office for the following expenses allocated by the home office to the branch:
depreciation expense, $500; other operating expenses, $200.
8. Remitted $5,000 to the home office.
9. Collected $14,000 on accounts receivable.
10. Collected a note for the home office in the amount of $3,000 plus $150 interest.
11. Received notice that the home office had collected $1,000 from a branch customer (assume that it was a customer
included in item 3).
12. Closed the nominal accounts to the revenue and expense summary account. Branch beginning and ending inven-
tories were $1,900 and $2,000, respectively.
13. Closed the balance of the revenue and expense summary account.

R E Q U I R E D : Prepare journal entries to reflect the transactions and events in the accounts of the branch and
the home office.

W 10-10
Adjusting entries on home office books to eliminate unrealized profits
Yak Corporations home office ships merchandise to its Vinton branch at a billing price of 120% of cost. During 2011,
the home office makes the following entry:
Vinton branch (+A) 60,000
Shipments to Vinton branch (-E, +SE) 60,000

At year-end 2009, $12,000 of this merchandise remains in the Vinton branch inventory.

R E Q U I R E D : Prepare the entry or entries necessary on Yaks home office books at year-end 2011 to adjust
the branch inventory and branch profit to a cost basis.
ES132 CHAPTER 10

W 10-11
Determine cost of goods sold with outside purchases
Medina Corporation has operations in two locationsa main plant and a branch plant. The branch receives most of its
inventory from the main plant, but it also purchases some items from local suppliers. The main plant transfers mer-
chandise to the branch at cost, and this merchandise is inventoried by the branch at cost. The following data for 2009
are available:

Main Plant Books Branch Plant Books

Inventory January 1 $ 126,000 $ 24,000

Purchases 1,400,000 48,000
Shipments to branch 300,000
Shipments from home office 300,000
Inventory December 31 120,000 26,000

One-fourth of the beginning branch inventory was acquired from outside suppliers. The branch ending inventory
includes $5,000 from outside suppliers.

R E Q U I R E D : Determine the cost of goods sold amount to be included in the published income statement of
Medina Corporation for 2011.

W 10-12
Prepare a reconcilliation of home office and branch accounts
Liberty Company operates two storesthe home office store and the Maywood branch. On December 31, 2011, the
Maywood branch account on the home office books has a balance of $340,000. On this same date, the Maywood
branch books show a home office account balance of $319,000.
Both stores use a standard 120% markup on cost. However, Libertys home office ships merchandise to the
Maywood branch at cost. Maywoods ending inventory includes $20,000 of merchandise received from the home
office.
Maywood remitted $15,000 to the home office on December 30, 2009. However, the check was not delivered until
January 5, 2012. The home office allocated $5,000 general expenses to the Maywood branch, but this expense alloca-
tion had not been recorded by the Maywood branch at year-end.
Maywood paid $2,000 for advertising after Christmas sales that was to be allocated equally between the two
stores. The home office has not recorded its share of this expense.

R E Q U I R E D : Prepare a reconciliation of the home office and branch accounts.

W 10-13
Cost of sales schedule and comparative home office, branch, and combined income
statements
Summarized data taken from the trial balances of Manning Corporations home office and branch at December 31,
2011, are as follows:

Home Office Branch

Other assets $340,000 $ 61,200

Branch 50,000
Inventory, January 1 10,000 4,800
Purchases 80,000
Shipments from home office 24,000
Expenses 20,000 10,000
$500,000 $100,000
Liabilities $ 26,000 $ 10,000
Home office 50,000
Capital stock 200,000
Retained earnings, January 1 130,000
Sales 120,000 40,000
Shipments to branch 24,000
$500,000 $100,000
 Electronic Supplement to Chapter 10 ES133

The home office ships merchandise to its branch at home office cost. At December 31, 2011, the home office inven-
tory at cost was $15,000 and the branch inventory was $6,000.

REQUIRED
1. Prepare a schedule of cost of sales.
2. Prepare comparative home office, branch, and combined income statements for Manning Corporation for
the year ended December 31, 2011.

W 10-14
Closing entries, combined balance sheet, and income statement
Summary adjusted trial balances for the home office and branch of Tanker Corporation at December 31, 2011, are as
follows:

Home Office Branch

Debits
Other assets $ 530,000 $165,000
Inventories January 1, 2011 50,000 45,000
Branch 200,000
Purchases 500,000
Shipments from home office 240,000
Expenses 120,000 50,000
Dividends 100,000
Total debits $1,500,000 $500,000
Credits
Other liabilities $ 90,000 $ 25,000
Capital stock 500,000
Retained earnings 100,000
Home office 175,000
Unrealized profit in branch inventory 10,000
Sales 537,500 300,000
Shipments to branch 200,000
Branch profit 62,500
Total credits $1,500,000 $500,000

A D D I T I O N A L I N F O R M AT I O N
1. The home office ships merchandise to its branch at 120% of home office cost.
2. Inventories at December 31, 2011, are $70,000 for the home office and $60,000 for the branch. The
branch inventory is at transfer prices.

REQUIRED
1. Prepare a combined income statement for Tanker Corporation for the year ended December 31, 2011.
2. Prepare a combined balance sheet for Tanker Corporation at December 31, 2011.

W 10-15
Prepare a schedule of cost of sales and combining working papers
Anselmo Company operates retail hobby shops from the main store and a branch store. Merchandise is shipped from
the main store to the branch and is billed to the branch at an arbitrary 10% markup. Trial balances of the main store and
branch as of December 31, 2011, are as follows:

Main Store Branch

Debits
Cash $ 1,500 $ 1,000
Accounts receivablenet 200
Inventory December 31, 2010 3,500 2,500
ES134 CHAPTER 10

Main Store Branch

Buildingnet 60,000 18,000

Equipmentnet 30,000 12,000
Branch store 32,300
Purchases 240,000 11,000
Shipments from home office 99,000
Other expenses 15,000 7,000
$382,500 $150,500
Credits
Accounts payable $ 15,000 $ 500
Unrealized inventory profit 9,200
Main store 30,000
Capital stock 50,000
Retained earnings 16,000
Sales 200,000 120,000
Shipments to branch 90,000
Profit from branch 2,300
$382,500 $150,500

Inventories on hand at December 31, 2011, at the main store and branch are $3,000 and $1,800, respectively. The
December 31, 2010, branch inventory includes merchandise purchased from outsiders of $300, and the December 31,
2011, branch inventory includes $150 of merchandise purchased from outsiders.

REQUIRED
1. Prepare a schedule of cost of goods sold.
2. Prepare working papers to combine the main store and the branch accounts for 2011.